The end of 2010 was marked by a flurry of legislative activity in the U.S. Congress. Congressional Democrats fought desperately to pass their agenda before facing a far less friendly political landscape. The stakes were high, including a potential government shutdown, the repeal of the military’s “Don’t Ask, Don’t Tell” policy, and billions of dollars in tax cuts.

In the midst of these high-profile debates, Congress quietly dropped an obscure, technical bill that one government agency claimed would have saved U.S. consumers billions of dollars. 1The proposed bill was known as the “Preserve Access to Affordable Generics Act.” 2It would have made certain types of settlements between pharmaceutical companies and generic manufacturers that delay the entry of generic medications into the market, commonly known as “pay-for-delay” settlements, presumptively anti-competitive. 3

Pay-for-delay settlements stem from a provision of the Hatch-Waxman Act that grants a 180-day period of market exclusivity to the first generic drug manufacturer to file, but only if the generic does not infringe on any valid patents. 4This market exclusivity does not apply to an “authorized generic,” which is the brand-name company’s own generic version of its product. 5In the hope of getting to market earlier, generic manufacturers have become more aggressive in attacking the validity of pharmaceutical patents. A 2002 Federal Trade Commission (FTC) study found, “generic applicants prevailed in nearly 75% of the patent litigation ultimately resolved by a court decision.” 6In the majority of cases in which the generic manufacturer prevails, the consumer benefits by gaining earlier access to a low-cost generic competitor to the brand-name drug.

To avoid the high costs of patent litigation and uncertainty of trial, brand-name patent holders and generic manufacturers challenging the patent often prefer to negotiate out-of-court settlement agreements. These settlements can take several forms, one of which is essentially an agreement by the brand-name pharmaceutical manufacturer to pay the generic manufacturer to delay its entry into the pharmaceutical market. The brand-name manufacturer can agree to pay cash to the generic manufacturer to drop its claim, it can offer some percentage of the profits from its monopoly, or it can agree not to enter the generic market, thus granting the generic manufacturer a 180-day period of “generic exclusivity.” 7

Pay-for-delay settlements are a win-win for pharmaceutical patent holders and generic manufacturers. The brand-name patent holder is able to maintain market exclusivity for longer than it would had it lost the suit, and the generic manufacturer gets some valuable consideration, either cash or “generic exclusivity,” that it receives only as a result of the settlement.

Opponents of these agreements claim that they are anti-competitive and point to the huge financial burden placed on consumers who must continue to pay monopoly prices for drugs that might otherwise have been available in generic form. A recent FTC study concluded that the cost to consumers of such agreements was likely to reach $35 billion over 10 years. 8A more conservative estimate from the Congressional Budget Office still anticipated $2.5 billion in savings. 9

However, the pharmaceutical industry has questioned the validity of these studies. The Pharmaceutical Research and Manufacturers of America (PhRMA), the primary pharmacy and biotechnology advocacy group, commissioned a study which attacked the assumptions of the FTC and CBO studies and suggested that savings were likely to be significantly lower. 10

Another scholar agrees that banning these settlements could do more harm than good. He argues that banning these settlements would force courts to evaluate pay-for-delay settlements. Courts, he argues, would misunderstand the unique role of pharmaceutical patents and invalidate patents that ought to be protected. This would result in reduced innovation. He concludes that these agreements are necessary to preserve incentives for pharmaceutical innovation. He further argues, “widespread insurance prevents patients from being priced out of patented drugs.” Therefore, he claims, consumers are less likely to feel the effects of any inflated prices. 11

However, while insurance may be widespread, it is far from universal. A 2010 Centers for Disease Control and Prevention (CDC) survey found that approximately 25 percent of Americans between the ages of 18 and 64 lacked health insurance for at least some period during the previous year. 12Even more are underinsured or are subject to high deductibles. For that significant proportion of the population who pay for medications out-of-pocket, whether a generic has entered the market can make an enormous difference.

The executive branch has more generally rejected the argument that pay-for-delay agreements are necessary for innovation. The FTC points out that there are other ways to settle patent litigation without resorting to pay-for-delay, and concludes that the burden on consumers is too high. 13In fact, the FTC has aggressively prosecuted pay-for-delay agreements as anti-competitive, but the courts have consistently found that such agreements do not violate anti-trust law. 14This has led for opponents of these agreements to call for a legislative solution.

The response to that call was the “Preserve Access to Affordable Generics Act.” This bill was most recently introduced as a rider to the 2011 Senate Appropriations Bill, 15only to be dropped at the end of the session as Congress chose to pass a continuing resolution rather than a new appropriations bill. This proposed legislation made reverse payments from pharmaceutical patent holders to generic manufacturers in exchange for delaying the generic’s entry into market presumptively anti-competitive. The burden would have been placed on the parties to “demonstrate by clear and convincing evidence that the pro-competitive benefits of the agreement outweigh the anti-competitive effects of the agreement.” 16

The future of the pay-for-delay ban is in doubt. In the current Congress, the ban barely made it out of the Senate Appropriations, surviving on a 15-15 vote. 17Despite the Democratically-controlled Congress, previous efforts, including attaching the bill to the healthcare reform legislation, 18have failed. With Republicans taking control of the House and gaining substantially in the Senate, the future of the bill appears bleak. Absent a political solution, the courts will continue to decide the issue. Although it has declined the opportunity to hear the issue in the past, the Supreme Court a recent cert petition presents the issue squarely, asking “whether . . . a brand drug maker's substantial payment to a competing generic drug maker to forgo judicial testing of the patent and restrict entry is per se lawful under the Sherman Act.” 19

Whether legislation is necessary to prevent undue burden on consumers, or whether pay-for-delay agreements foster innovation is a source of legitimate debate. However, with billions of dollars, and likely the health and lives of many of America’s uninsured and underinsured at stake, the question of pay-for-delay settlements deserves an open and vigorous debate rather than a quiet and unnoticed death.